From PRINT EDITION MicroCap Review Fall 2017

Thursday, February 01, 2018

In the multi-billion dollar North American cannabis industry, this is surely the most ambitious power play of all.

Amazingly, it involves a low-key, publicly-listed Canadian company from laid-back British Columbia, rather than a deep-pocketed US corporate powerhouse.

Until recently, Emerald Health Therapeutics (TSX.V: EMH) (OTCQX: EMHTF) has been best known for being an R&D incubator of proprietary intellectual property in the race to innovate cannabis-based medicinal therapies.

Now this small Victoria-based cultivator of pharmaceutical-grade cannabis is throwing down the gauntlet to its much larger rivals.

Emerald Health has announced plans to become Canada’s most dominant cannabis grower. This involves a shrewd leveraging strategy. Indeed, it appears to be an optimal template for scaling-up production in a big way, which can be achieved at a relatively low-cost and on an expedited timeline. More on this in a moment.

First, investors need to know what’s ultimately at stake.

The Holy Grail of Cannabis is Finally Within Reach

Canada’s largest industrial-scale cannabis growers have lately been jostling for pole position in the race to capture the lion’s share of Canada’s looming legal recreational market.

Early-market entrants will have an unprecedented opportunity to earn brand loyalty among as many as an estimated eight million Canadians — approaching 25% of the population.

In fact, this mainstreaming of cannabis consumption is expected to be worth up to CDN $10 billion a year, according to investment industry analysts. And this new marketplace will open up as early as next summer.

So the small handful of big players among Canada’s industrial-scale growers are already trying to out-do one another in the run-up to the end of decades of prohibition.

They have each announced grandiose plans for growing vast amounts of pharmaceutical-grade cannabis in an assortment of new high-tech facilities. These operations will involve modular structures ranging in size from several hundred thousand feet to as much as one million square feet. The biggest of them will cover an area larger than 20 football fields.

What all these in-development facilities have in common is that they will each cost around CDN $100 million dollars (or even more) to build to full capacity. Also, each of them will take a year or longer to commission.

However, Emerald Health is taking a faster and less risky approach to scaling-up in a significant way.

Why Bigger is Better

Emerald Health’s founder and Executive Chairman of the Board, Dr. Avtar Dhillon, is a former family physician. He is also part of a US-based family business that is one of California’s largest cultivators of fruit and vegetables. So he benefits from considerable expertise in the science and logistics of achieving impressive economies of scale.

In Canada, Dr. Dhillon’s apparent master stroke involves his company’s recently announced decision to team up with Village Farms International Inc. (TSX: VFF). Headquartered in Greater Vancouver, Village Farms had sales of around CDN $206 million in 2016. It is also North America’s largest technologically-advanced, low-cost grower of supermarket produce.

This strategic alliance means that an existing network of sophisticated greenhouse growing facilities will be re-purposed to produce recreational cannabis — a much more profitable venture.

Village Farms will initially contribute up to 1.1 million square feet of existing state-of-the-art greenhouse capacity to the 50/50 joint venture partnership.

All told, as much as 4.8 million square feet of greenhouse infrastructure can ultimately be retrofitted to cultivate cannabis via this arrangement. This could yield up to 300,000 kilograms of dried flower cannabis annually.

Ultimately, this allows the company to develop value-added downstream products — namely cannabis oils — on a massive scale. Which is very shrewd because sales of cannabis oils in Canada are virtually doubling every 90 days.

In fact, investment industry analysts forecast that consumption of cannabis oils in Canada will expand exponentially for many years to come, especially with the advent of a recreational market.

Dr. Dhillon comments, “We’re already positioning ourselves to be a world-class leader in innovating value-added downstream products, such as cannabis oils. This is where the biggest profit margins are.”

Targeting the Multi-Billion Dollar Pain Management Market

Dr. Dhillon is determined to make Emerald Health a key player in Canada’s burgeoning big-dollar medical marijuana market.

Within months, his company intends to launch gel capsules with consistent dosage levels of cannabis oils that will meet Health Canada’s strict standards.

In particular, the company’s scientists are using advanced plant genetics to develop optimal cannabis strains and cannabis oils that can be dialled-in to treat specific types of pain and sleep disorders.

According to Dr. Dhillon, “By targeting the requirements of healthcare providers — consistent dose, quality manufacturing, oral delivery, and clinical evidence — we will engage the medical gatekeepers to support and expand the use of our medicinal products.”

This steadfastness to the company’s core competency can be seen in Emerald Health’s undertaking to develop 100,000 square feet of state-of-the-art, indoor growing facilities in Greater Vancouver. The new operation will also include a laboratory to incubate the company’s intellectual property, specifically plant genetics.

The company’s existing pilot growing facility in Victoria will continue to focus on R&D, manufacturing oils and servicing medical patients.

Investment Synopsis

Emerald Health’s joint venture partnership with Village Farms is a game-changing differentiator; it will allow them to capture significant market share in a multi-billion-dollar recreational marketplace for cannabis.

To this point, Emerald Health is committed to becoming one of Canada’s lowest-cost producers, which promises to be an enormous competitive advantage. Additionally, a major driver for the company’s revenue growth will be the mass-production of high-margin cannabis oils.

Due to the fact that this business model can be rolled-out cost-effectively and with reduced execution risk, investors are presented with a compelling value proposition.

Furthermore, let’s not forget that Emerald Health is also poised to become a market leader — perhaps even a household name — in the blossoming medical marijuana sector.

All in all, it is becoming increasingly apparent that Emerald Health is a dynamic success story in-the-making.